There have not been many foreclosures in Hawaii so far and I doubt at this point we will see many in the short term but what I am starting to see is a rise in short sale listings.
Each morning when I recap the previous day’s numbers of inventory for sale, escrows, sales, withdrawn and expired listings, I usually will take a closer look at the withdrawn and expired listings. I do this to ascertain the feasibility of writing to the owner and convincing them to list their property with me if I have a good idea I can sell it in a reasonable time frame and at a reasonable price and profit to the owner.
What I am starting to see now are listings coming off of the market that when I look up the owner information on the Tax Map data base or “T.M.K.” I see that the owners have recently purchased, usually in an up market and now have no equity to pay for the costs associated with a sale and meet the financial obligation to the lender without going into the negative or going ‘under water.’ This can be a short sale situation.
Often times you will see listings for sale that actually have written into the comments section ‘short sale.’ This means that the lender has come to an agreement with the owner on a price that the lending institution will take from the owner and forgive the rest of the debt.
The only reason a lender will even consider a short sale is because they do not want to own real estate nor take the time and costs associated with a bankruptcy proceeding if they can come to an agreement with the owner and cut their losses in a relatively short time period.
An owner who is in a short sale position can no longer afford the mortgage nor have any means to repay the loan from other assets or resources. This may be a good way to walk away from the property legally and without totally ruining their credit.
The process should begin with a Comparative Market Analysis or C.M.A. for the home. This can be obtained by a real estate agent who will pull the data from a reliable source such as the Honolulu Board of Realtors which the agent should be a member of. In addition to this process there should also be included a current market analysis of what is happening in the owner’s neighborhood and the general real estate market conditions for the Island as a whole. Included in these documents can also be articles written by other qualified real estate sources to support the declining conditions of the real estate market. The agent can provide you a “Brokers Price Opinion or B.P.O.” which the lender may also require. The owner can also submit their own appraisal but often these appraisals will come in higher than the owner needs them to be. This is especially true in a declining or ‘down market’ as we find ourselves in today.
A home inspection may be another supporting document that the owner may want to provide the lender along with photos and a detailed inspection report. The inspection report will show the homes deficiencies and add to the other supporting documents on the owner’s current market value.
Accompanied with the home inspection can also be several quotes to repair the deficiencies. The owner should be realistic and provide quotes that may be the median of three or more.
The process of a short sale is not an easy matter. It is difficult and time consuming. I think it best to find a real estate agent with experience in this matter. It should be noted that many agents do not have this experience as many of the agents in the business today came in when it was an up market and many of these same agents who are swelling the ranks now will leave the business during this down market. Those agents who have been through at least one up and down market will most likely have the experience you will require. These are the agents you need to work with.
Before listing the property for sale however the owner will need to contact the lender and probably ask for the “Loss Mitigation Department” or similar titled department and speak to a member of this department who actually has the authority to negotiate on behalf of the lending institution a short sale with you and agree to take less than what is due at closing on your loan. This may not be as easy at it sounds as finding that person who has this authority may take repeated phone calls and subsequently more time.
Once you have found this person you will need to write a ‘Distress Letter’ or ‘Hardship Letter’ outlining the financial hardship as the owner of the home and that you cannot continue to make the mortgage payments or repay the loan. Of course this letter needs to accompany documentation from the owner clearly showing that they do not have other assets or resources to pay the mortgage nor the full loan amount. Often the lending institution will provide you with forms to be filled out to conform to their requirements in addition to your own supporting documents.
When an agreement has been reached on a price the lender will be willing to accept on your loan balance upon the sale of your property you can at that point contact an agent and list the property for sale. The listing will include in the public view of the Multiple Listing Service comments to the effect it is a short sale and subject to the lenders approval.
I think it is becoming clearer that this is a time consuming process and filled with many challenges, the least of all of which is that the lender often can reject any contract offer it deems is not in its best interest. This presents additional challenges for the not only the owner who is trying to sell the property but also the potential buyer who may want to just forget all about a short sale because while they waiting for an approval of their offer the market is passing them by and others are purchasing the properties they may have wanted to purchase.
A short sale also presents challenges to the successful sale as the agents conducting the negotiations for the seller and the buyer are often asked to accept less commission by the lending institution of the owner and not all agents will want to do this.
The closing costs associated with a short sale are often become more a burden for the buyer than the owner as the lending institution wants to reduce their losses and recapture as much of their loan as possible so they will insist that the potential buyer foot the bill for more of the closing costs that are normally costs associated with the sellers closing costs.
The I.R.S. and the Short Sale - Mortgage Forgiveness Debt Relief Act of 2007
The I.R.S. basically says that there is ‘no free lunch.’ When you sell your home either voluntarily or involuntarily (foreclosure) you may be subject to taxes even if you sold at a loss or through the means of a short sale.
In addition there are no deductions to the seller for costs associated with the short sale such as lawyers, agents and other professionals.
The tax consequences can be severe. As an example say a Mr. Nakamoto buys a condo and uses it as his personal residence. He purchases the unit for $300,000 with a $15,000 down payment. This makes his mortgage balance $285,000.
The current market value of the home is now $235,000 and Mr. Nakamoto can no longer afford the home and cannot rent it monthly for what he owes on the monthly mortgage. Mr. Nakamoto sells the home for $235,000. The shortfall is $50,000 and is taxed at the rates for ordinary income, the same as if it were a salary.
It is best that anyone considering a short sale take a short tour of the I.R.S. website at http://www.irs.gov/ and become familiar with the tax consequences.
In conclusion I must point out that I am not an Accountant, nor qualified as a Tax professional and all research and conclusions should be drawn strictly by the reader. It is up the reader to conduct their own investigations into the tax laws and particulars of a short sale.
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